Birmingham, the UK’s second-largest city, has had one of the UK’s fastest economic recoveries from the pandemic, attracting record levels of inward investment and creating a palpable buzz in its central business district.
But this prosperity contrasts with the severe financial difficulties faced by Labour-run local authorities.
This week, Birmingham City Council issued a Section 114 notice – meaning the city is effectively insolvent – announcing it will be unable to meet its legal obligations to balance its books this year.
The demise of Europe’s largest single-tier local authority – in terms of the people it serves and the services it delivers – has intensified the debate over local government finance in the UK.
The council said the immediate cause of its crisis was that the potential liability for equal pay claims by thousands of staff, the majority of whom were female, had recently jumped to £760m, the equivalent of its annual services budget.
But local government experts also pointed to the wider national picture, in which Conservative governments cut funding for local authorities in the decade to 2020, hitting metropolitan areas such as Birmingham particularly hard.
The city expects a budget shortfall of £87.5m this year and, according to the council, has been forced to save more than £1bn since 2010, reducing its budget by 60p.
“Obviously, the £760m equal pay claim was a mistake, and a big one. But if the system is very fragile, it won’t have the capacity to absorb shocks.” Jonathan Carr-West, chief executive of the Local Government Information Unit, a think tank -West) said.
“The bigger story is that this city is just a small part of the iceberg we’re seeing right now. There’s a lot of trouble elsewhere,” he added.
Former housing officer Sharon Thompson, who took over as Deputy Speaker of Birmingham Council in May, said the agency had been “digging deep” to determine the extent of its liabilities. Starting in July, the government has tightened spending on all but essential services.
The council admitted mistakes were made when introducing new Oracle IT systems, resulting in cost overruns of around £75m. It has also launched an inquiry into why the pay gap between men and women has not narrowed despite past warnings, and who is responsible.
“It’s going to be painful. But we’re determined to get through it,” Thompson said.
Just a decade ago, the council was forced to pay £1.1bn to settle claims related to discriminatory pay inherited from the previous Conservative-Liberal Democrat coalition government. This allows workers in male-dominated roles such as waste collection to earn higher wages than equivalent roles traditionally held by women, such as cleaners and teaching assistants.
To pay the claim, the council, then run by Labour, sold a number of assets, including the leasehold rights to the National Exhibition Centre, one of its most valuable properties.
Leadership will keep its current recovery plans confidential ahead of an upcoming council meeting and closed-door discussions with the Department of Upgrading, Housing and Communities.
“We have been in dialogue with the government for several months about the challenges we face. We will consider all options because we want to protect our staff as much as possible and we want to protect services,” Thompson said, adding that the top priority is to ensure support is provided for the most vulnerable in society.
Section 114 requires councils to cut spending on core functions such as adult and children’s social care and waste collection, which could have painful consequences for non-segregated projects.
Commission insiders say one way out of the current crisis is to securitize equal pay claims, borrowing against them and paying them back over time, which would require government help.
But Conservatives in the city believe the worst of the pain can be avoided if the council is willing to make use of its land and property holdings – the widest of any local authority in the UK.
“What can’t be done is salami-slice services,” said Andy Street, the Tory regional mayor in the West Midlands coalition government.
One of Street’s biggest concerns, shared by the city council, is that Birmingham’s regeneration achievements are being undermined and efforts over the past decade to revitalize the city’s reputation are reversed.
Birmingham’s economy has grown by 36% since 2013, to £29bn, making it the city that attracted the most foreign direct investment outside the capital over the past year.
“We have to redouble our efforts and beat the drum of success. I’m spending time talking to developers and various investors and I hope what I can do personally is participate in the conversation with the government to make sure that we do find a solution that meets everyone’s maximum Benefit solutions.”
Meanwhile, the funding crisis has created a dilemma for Rishi Sunak. The Prime Minister was quick this week to blame Labor for the Birmingham council’s woes, telling parliament the country could face the same problems if the party wins next year’s general election.
But Matt Cole, professor of history at the University of Birmingham and an expert on the city’s politics, said the strategy came amid a wider national crisis in local government financing, caused in large part by spending cuts by successive Conservative governments. Might be counterproductive.
Until recently, bankrupt councils such as Birmingham faced specific challenges. But now almost all of the country – including the large Tory-run county authorities in Hampshire and Kent and the city of Stoke-on-Trent – are sounding the alarm.
According to a recent LGIU survey only 14% of senior parliamentarians are confident of its financial sustainability.
“This is very bad news for the councils involved. It’s also a challenging story for the government. It brings back the whole question of who is cutting funding,” Cole said.
The Department of Housing and Communities Upgrade said: “We have been in regular contact with Birmingham City Council in recent months regarding the pressures it faces, including issues such as equal pay obligations and failures in the implementation of IT arrangements, and have raised serious concerns about its governance arrangements.
“We will continue to monitor funding pressures on councils closely to ensure we understand the costs they face.”
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